Jakobsen: Der har været et jordskælv på aktiemarkedet

Fra Steen Jakobsen, Saxo Bank:

What: Momentum stocks “collapsing” vs. Value stock rising – A move which is an equity earthquake

Why: US interest rates have shifted up by 20 bps to 35 bps in a few days – a highly unusual move considering that FOMC is next week and a minimum of 25 bps cut is fully priced in

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Action: Creates negative bias in momentum big names (NASDAQ) – UNDERWEIGHT –   while we like OVERWEIGHT value stocks (VLUE:BATS)

Value stocks = Banks, Mining companies & Energy mainly
Momentum = Technology, Entertainment, consumer stables

Value is cheap – dirt cheap – and now the forceful move up in US interest rates has made “models” buy value and sell momentum as value stocks is similar to being long interest rates (through banks) while rising cost of capital “destroys” high duration assets discounted capital value. Elementary, Dr. Watson?

Read: Our own Peter Garnry has been on the ball: https://www.home.saxo/insights/content-hub/articles/2019/09/11/equities-rebound-on-positive-trade-news

Summary:  Nikkei futures are leading the gains in equities on positive trade news from China. We also take a look at the massive quant quake that took place in momentum stocks yesterday. Finally we focus on Uber following California passing a new bill that will most likely force the company to reclassify its contractors as employees.

China has announced exemptions from the 25% extra tariffs put in place last year in some product categories such as pharmaceuticals and lubricant oil. This softer stance is being viewed a move by China to restart the trade negotiation on good terms in October. This has lifted sentiment in Asia combined with a technical rebound generally in equities.

Risk-on with Nikkei futures leading the gains

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Leading the rally in equities is once again Japanese equities with Nikkei futures up 1.1% erasing the losses from the intermediate peak in July. As we said repeatedly over the last week, we prefer German and Japanese equities as high beta play on risk sentiment and general optimism. As we highlighted in yesterday’s equity update economic surprises have become less and less negative with Citi’s Economic Surprise Index G10 turning almost positive. If we are right that central banks will deliver enough monetary stimulus, with ECB starting tomorrow, and macro data begin to surprise positively then the rally could continue.

Source: Saxo BankSource: Saxo Bank

Momentum crash and value pops

Beneath the surface of equity markets yesterday a quant quake 2.0 escalated in US session with neutral momentum (long stocks with the highest momentum and short those with the lowest momentum) strategies experiencing massive losses. Bigger than the first quant quake in August 2007. As the chart shows the reverse has happened in neutral value strategies.

Source: Bloomberg

Our hypothesis is that over the past year momentum stocks have increasingly got characteristics of high growth and high valuation stocks which means that momentum stocks have become long duration assets. This is because these stocks derive a larger share of their present value from cash flows far into the future. As a direct result these stocks are more sensitive to interest rate changes. Value stocks on the other hand have increasingly become short duration assets with companies deriving most of their present value from near-term cash flows. When US 10-year interest rate rise by 28 basis points then long duration assets will go down relative to short duration assets.

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Judging from price action in the European session the sell-off in momentum stocks is over so we would not be surprised to see short-term rebound and outperformance among momentum stocks.

Stocks to watch

With California’s Assembly Bill 5 passed Uber’s shares will be in focus today as the new bill could force Uber (UBER:xnys) and other companies selling contractors on their platforms to classify contractors as employees. As Uber stated in their S-1 filing before going public this was one of the key risks for investors. It could potentially erode the entire price differential between traditional taxi companies and Uber drivers. Is Uber then just a taxi company with a fancy app? Uber shares were up 4% yesterday as the company announced further layoffs to rein in accelerating losses.

Source: Saxo Bank

Assembly Bill 5 says that people in California can only be a contractor if their work is outside the usual course of the company they work for.

Apple (AAPL:xnas) introduced its iPhone 11 yesterday which now comes in three different versions with cheapest version selling for $699 which a price cut aimed to lure smartphone buyers back into Apple’s realm. The stock market reacted positively to the news, but criticism has surfaced that Apple is falling behind as the new iPhone 11 is not coming with a 5G integration which makes almost impossible for Apple to have growth in China where local smartphone makers such as Huawei is introducing smartphone with 5G integration. Beginning in the second half of 2020 this will be a constraint for Apple.

Source: Saxo Bank


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